Question

What is the fundamental reason the reported amount of net income per books and the reported amount of taxable income generally are different? What are example that create a difference between the two amounts? Explain.

Answer 1

BOOK INCOME vs TAX INCOME

A company's Income before Taxes as per accounting records is its Book Income. This is what the company reports to the shareholders.

Tax income is what the company reports on its annual income tax return.

There can be THREE types of differences

1. Temporary differences - There are certain transactions that would be allowed in both tax books and normal books but their timing would differ. Example would be an advance received for a service. As per tax laws, it is taxable when received but as per accounting records it would be recognized as an income when the services would be performed.

2. Permanent differences - Certain expenses that are not allowed as a deduction at all. Example would be penalties that are shown as expense in the books of accounts but is not allowed in tax return

3. Loss carry forwards/carry backs